Texas factory activity fell sharply in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key measure of state manufacturing conditions—dropped 23 points, from 12.7 to -10.2, suggesting output declined this month after growing throughout fourth quarter 2015.

Other indexes of current manufacturing activity also indicated contraction in January. The survey’s demand measures—the new orders index and the growth rate of orders index—led the falloff in production with negative readings last month, and these indexes pushed further negative in January. The new orders index edged down to -9.2, and the growth rate of orders index fell to -17.5, its lowest level in a year. The capacity utilization index fell 15 points from 8.1 to -7, and the shipments index also posted a double-digit decline into negative territory, coming in at -11.

Perceptions of broader business conditions weakened markedly in January. The general business activity and company outlook indexes fell to their lowest readings since April 2009, when Texas was in recession. The general business activity index fell 13 points to -34.6, and the company outlook index slipped to -19.5.

This is a change from Tetlock’s first study – Expert Political Judgment – which lasted about twenty years, concluding, famously, ‘the average expert was roughly as accurate as a dart-throwing chimpanzee.”

Tetlock’s recent research comes out of a tournament sponsored by the Intelligence Advanced Research Projects Activity (IARPA). This forecasting competition fits with the mission of IARPA, which is to improve assessments by the “intelligence community,” or IC. The IC is a generic label, according to Tetlock, for “the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, and thirteen other agencies.”

It is relevant that the IC is surmised (exact figures are classified) to have “a budget of more than $50 billion .. [and employ] one hundred thousand people.”

Thus, “Think how shocking it would be to the intelligence professionals who have spent their lives forecasting geopolical events – to be beaten by a few hundred ordinary people and some simple algorithms.”

Of course, Tetlock reports, this actually happened – “Thanks to IARPA, we now know a few hundred ordinary people and some simple math can not only compete with professionals supported by multibillion-dollar apparatus but also beat them.”

IARPA’s motivation, apparently, traces back to the “weapons of mass destruction (WMD)” uproar surrounding the Iraq war –

“After invading in 2003, the United States turned Iraq upside down looking for WMD’s but found nothing. It was one of the worst – arguable the worst – intelligence failure in modern history. The IC was humiliated. There were condemnations in the media, official investigations, and the familiar ritual of intelligence officials sitting in hearings ..”

So the IC needs improved methods, including utilizing “the wisdom of crowds” and practices of Tetlock’s “superforecaster” teams.

Unlike the famous M-competitions, the IARPA tournament collates subjective assessments of geopolitical risk, such as “will there be a fatal confrontation between vessels in the South China Sea” or “Will either the French or Swiss inquiries find elevated levels of polonium in the remains of Yasser Arafat’s body?”

Tetlock’s book is entertaining and thought-provoking, but many in business will page directly to the Appendix – Ten Commandments for Aspiring Superforecasters.

Triage – focus on questions which are in the “Goldilocks” zone where effort pays off the most.

Break seemingly intractable problems into tractable sub-problems. Tetlock really explicates this recommendation with his discussion of “Fermi-izing” questions such as “how many piano tuners there are in Chicago?.” The reference here, of course, is to Enrico Fermi, the nuclear physicist.

Strike the right balance between inside and outside views. The outside view, as I understand it, is essentially “the big picture.” If you are trying to understand the likelihood of a terrorist attack, how many terrorist attacks have occurred in similar locations in the past ten years? Then, the inside view includes facts about this particular time and place that help adjust quantitative risk estimates.

Strike the right balance between under- and overreacting to evidence. The problem with a precept like this is that turning it around makes it definitely false. Nobody would suggest “do not strike the right balance between under- and overreacting to evidence.” I guess keep the weight of evidence in mind.

Look for clashing causal forces at work in each problem. This reminds me of one of my models of predicting real world developments – tracing out “threads” or causal pathways. When several “threads” or chains of events and developments converge, possibility can develop into likelihood. You have to be a “fox” (rather than a hedgehog) to do this effectively – being open to diverse perspectives on what drives people and how things happen.

Strive to distinguish as many degrees of doubt as the problem permits but no more. Another precept that could be cast as a truism, but the reference is to an interesting discussion in the book about how the IC now brings quantitative probability estimates to the table, when developments – such as where Osama bin Laden lives – come under discussion.

Strike the right balance between under- and overconfidence, between prudence and decisiveness. I really don’t see the particular value of this guideline, except to focus on whether you are being overconfident or indecisive. Give it some thought?

Look for the errors behind your mistakes but beware of rearview-mirror hindsight biases. I had an intellectual mentor who served in the Marines and who was fond of saying, “we are always fighting the last war.” In this regard, I’m fond of the saying, “the only certain thing about the future is that there will be surprises.”

Bring out the best in others and let others bring out the best in you. Tetlock’s following sentence is more to the point – “master the fine art of team management.”

Master the error-balancing cycle. Good to think about managing this, too.

Great topic – forecasting subjective geopolitical developments in teams. Superforecasting touches on some fairly subtle points, illustrated with examples. I think it is well worth having on the bookshelf.

There are some corkers, too, like when Tetlock’s highlights the recommendations of 2nd Century physician to Roman emperors Galen, the medical authority for more than 1000 years.

Galen once wrote, apparently,

“All who drink of this treatment recover in a short time, except those whom it does not help, who all die…It is obvious, therefore, that it fails only in incurable cases.”

Lord Rothschild is concerned about the growing military conflict in eastern Europe and the mid-east, deflation and economic challenge in Europe, stock market prices moving above valuations, zero interest rates, and other risk prospects.

Durden has access to some advisory document associated with Rothschild which features two interesting exhibits.

There is this interesting graphic highlighting four scenarios for the future.

And there are details, as follows, for each scenario (click to enlarge).

If I am not mistaken, these exhibits originate from last year at this time.

Think of them then as forecasts, and what has actually happened since they were released, as the actual trajectory of events.

For example, we have been in the “Muddling through” scenario. Monetary policy has remained “very loose,” and real interest rates have remained negative. We have even seen negative nominal interest rates being explored by, for example, the European Central Bank (ECB) – charging banks for maintaining excess reserves, rather than putting them into circulation. Emerging markets certainly are mixed, with confusing signals coming out of China. Growth has been choppy – witness quarterly GDP growth in the US recently – weak and then strong. And one could argue that stagnation has become more or less endemic in Europe with signs of real deflation.

It is useful to decode “structural reform” in the above exhibit. I believe this refers to eliminating protections and rules governing labor, I suppose, to follow a policy of general wage reduction in the idea that European production then could again become competitive with China.

One thing is clear to me pertaining to these scenarios. Infrastructure investment at virtually zero interest rates is no brainer in this economic context, especially for Europe. Also, there is quite a bit of infrastructure investment which can be justified as a response to, say, rising sea levels or other climate change prospects.

This looks to be on track to becoming a very challenging time. The uproar over Iranian nuclear ambitions is probably a sideshow compared to the emerging conflict between nuclear powers shaping up in the Ukraine. A fragile government in Pakistan, also, it must be remembered, has nuclear capability. For more on the growing nuclear threat, see the recent Economist article cited in Business Insider.

In terms of forecasting, the type of scenario formulation we see Rothschild doing is going to become a mainstay of our outlook for 2015-16. There are many balls in the air.

There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis. In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.

As if in validation of this perspective, Sheik Ali al-Naimi, the Saudi Oil Minister, is quoted in an interview at the beginning of this week

Also, Mr Naimi said that if Saudi Arabia reduced its production, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share”.

Higher Cost Oil Producers Impacted

Estimates of the cost to the Saudi’s for extracting their oil out of the ground seem to be plummeting, along with the spot price of a barrel of crude. The above interview cited by the Financial Times also asserts that Saudi and other Gulf States can extract at $4-$5 a barrel.

That is an order of magnitude less than the production costs of oil from many US shale plays, much of the North Sea oil supplying revenues to Norway and the UK, as well as Russian and Iranian oil.

The rig count has been dropping, but many expect US shale oil production to continue increasing, as companies optimize existing wells and drill as long as already secured futures contracts cover output.

Given the low growth to deflationary profile in the global economy, this probably means a glut of petroleum on world markets for 2015 and, possibly, 2016.

Implications of a Period of Significantly Lower Oil Prices

The price of gasoline at the pump in the US is plummeting.

First-order effects for the American consumer probably more than balance the short-run negative impacts of cutbacks in the oil or shale patch. The typical household gets on the order of $100 extra in their pocket monthly, as long as the low prices continue. This is discretionary money that would have in all likelihood be spent anyway. So other products will benefit, plus people will drive more. It’s as simple as that.

China may be a major beneficiary, since its production is relatively energy-intensive and it is a net importer of petroleum products.

In Japan, which imports energy (all at prices based on crude oil) worth roughly 6% of GDP, the recent sharp price drop could lift real GDP growth by 1.5%–2%! This would largely offset the 3% hike in VAT imposed last year – or justify the second round 2% hike that was just cancelled. The drop in oil prices may save Abe short term, but it will also put at risk both the 3% inflation goal and the need to turn nuclear facilities back on.

Going Out on a Limb – Business Forecast Blog Prediction

OK, so I’m going out on a limb here and make the following prediction.

As long as there is no banking collapse, as a result of oil companies turning the junk bonds that financed their land purchases into true junk, or the Russian economy collapsing, dragging down the European banking system – all bets are off for a recession in 2015 and probably 2016.

These low oil prices are like a gift to many of the world’s economies, as well as many families reliant on the internal combustion engine to get them to and from work. Low oil prices also should help keep the cost of agricultural products down, again benefitting consumers.

Great phrase, but what does it mean? Well, maybe it has something to do with the fact that a lot of economic and political news seem to be entering kind of “end game.” But, it’s now the “lazy days of summer,” and there is a temptation to sit back and just watch it whiz by.

What are the options?

One is to go more analytical. I’ve recently updated my knowledge base on some esoteric topics –mathematically and analytically interesting – such as kernel ridge regression and dynamic principal components. I’ve previously mentioned these, and there are more instances of analysis to consider. What about them? Are they worth the enormous complexity and computational detail?

Another is to embrace the humming, buzzing confusion and consider “geopolitical risk.” The theme might be the price of oil and impacts, perhaps, of continuing and higher oil prices.

Or the proliferation of open warfare.

Rarely in recent decades have we seen outright armed conflict in Europe, as appears to be on-going in the Ukraine.

And I cannot make much sense of developments in the Mid-East, with some shadowy group called Isis scooping up vast amounts of battlefield armaments abandoned by collapsing Iraqi units.

Or how to understand Israeli bombardment of UN schools in Gaza, and continuing attacks on Israel with drones by Hamas. What is the extent and impact of increasing geopolitical risk?

There also is the issue of plague – most immediately ebola in Africa. A few days ago, I spent the better part of a day in the Boston Airport, and, to pass the time, read the latest Dan Brown book about a diabolical scheme to release an aerosol epidemic of sorts. In any case, ebola is in a way a token of a range of threats that stand just outside the likely. For example, there is the problem of the evolution of immune strains of bacteria, with widespread prescription and use.

There also is the ever-bloating financial bubble that has emerged in the US and elsewhere, as a result of various tactics of central and other banks in reaction to the Great Recession, and behavior of investors.

Finally, there are longer range scientific and technological possibilities. From my standpoint, we are making a hash of things generally. But efforts at political reform, by themselves, usually fall short, unless paralleled by fundamental new possibilities in production or human organization. And the promise of radical innovation for the betterment of things has never seemed brighter.

I will be exploring some of these topics and options in coming posts this week and in coming weeks.

And I think by now I have discovered a personal truth through writing – one that resonates with other experiences of mine professionally and personally. And that is sometimes it is just when the way to going further seems hard to make out that concentration of thought and energies may lead to new insight.

Nouriel Roubini: There’s ‘schizophrenia’ between what stock and bond markets tell you Stocks tell you one thing, but bond yields suggest another. Currently, Roubini is guardedly optimistic – Eurozone breakup risks are receding, US fiscal policy is in better order, and Japan’s aggressively expansionist fiscal policy keeps deflation at bay. On the other hand, there’s the chance of a hard landing in China, trouble in emerging markets, geopolitical risks (Ukraine), and growing nationalist tendencies in Asia (India). Great list, and worthwhile following the links.

The four stages of Chinese growth Michael Pettis was ahead of the game on debt and China in recent years and is now calling for reduction in Chinese growth to around 3-4 percent annually.

Because of rapidly approaching debt constraints China cannot continue what I characterize as the set of “investment overshooting” economic polices for much longer (my instinct suggests perhaps three or four years at most). Under these policies, any growth above some level – and I would argue that GDP growth of anything above 3-4% implies almost automatically that “investment overshooting” policies are still driving growth, at least to some extent – requires an unsustainable increase in debt. Of course the longer this kind of growth continues, the greater the risk that China reaches debt capacity constraints, in which case the country faces a chaotic economic adjustment.

As of July 1, interest on new student loans rises to 4.66 percent from 3.86 percent last year, with future rates potentially increasing even more. This comes as interest rates on mortgages and other consumer credit hovered near record lows. For a comparison, the rate on the 10-year Treasury is 2.6 percent. Congress could have imposed lower limits on student-loan rates, but chose not to.

This is but one example out of thousands of an inability to perform the basic duties, which includes helping to educate the next generation of leaders and productive citizens. It goes far beyond partisanship; it is a matter of lack of will, intelligence and ability.

I think the sea level rise is the most concerning. Not because it’s the biggest threat, although it is an enormous threat, but because it is the most irrefutable outcome of the ice loss. We can debate about what the loss of sea ice would mean for ocean circulation. We can debate what a warming Arctic means for global and regional climate. But there’s no question what an added meter or two of sea level rise coming from the Greenland ice sheet would mean for coastal regions. It’s very straightforward.

One my focuses is the global economy and any cracks in the firmament which might presage the next recession. I rely a lot on my Twitter account to keep me on the crest of the wave, in this regard.

I’m really concerned, as are many of my colleagues and contacts in business and government.

We’ve hardly escaped the effects of last recession 2008-2009. Those are US dates, of course, set by the National Bureau of Economic Research (NBER) the official recession “dater” in this country.

There have been a series of rolling impacts and consequences of this so-called “Great Recession.”

Europe

Housing or real estate bubbles were present in Europe, too, particularly in Spain and Ireland. Then, there was the problem of the Greek economy and state, which did not support the level of public debt that had been garnered by, in some cases, corrupt public officials. And European problems were complicated by the currency union of the euro in a context where there is not, as yet, a centralized EU state. Anyway, not to reprise the whole matter blow-by-blow, but most of Europe, with the exception of Germany, plunged into recession and struggled with austerity policies that made things worse for Main Street or, as they like to say in Britain, “High Street.”

So another recession in the next one to two years would really set them back.

China

Part of the problem China has been experiencing is related to the persisting downturn in most of Europe, since Europe is a big trading partner. And so, for that matter is the United States, which bought less from China during the recession years.

Newly wealthy Chinese do not really have any place to put their money, except real estate. The Chinese, like the Japanese, are big savers, and for many middle class families, buying the second apartment or even a house is an investment for the future. Yet Chinese real estate prices have skyrocketed, leaving the average Chinese wage earner in the dust, with less and less hope of ever owning a residence.

Can “market socialism” or “market Leninism” experience a financial crisis, based on too many debts that cannot be paid?

I’ve been to China a few times, and done some business there – all the while trying to understand how things are set up. My feeling is that one should not impute banking practices that seem pro forma in, say, Great Britain or the US, to the Chinese. I think they are much more ready to “break the rules” in order to keep the party going (which is sort of a pun).

Again, it’s hard to say how this might play out, since the victims and suffering would be among the nouveau riche of China, of whom there are millions, and many more average families who have invested their nest egg in a hot property.

But I can’t think that collapse of real estate values in modern China would not have worldwide repurcussions.

The Rest of the World

Regrettably, I cannot go through other major regions, one-by-one, but I’d have to say that things are not so good. The BRIC’s as a group all have more problems than a few years back, when they were hailed as the bright new centers of economic growth by that Goldman Sachs analyst. That’s Brazil, Russia, India, and China, of course.

Possibilities of Increased Conflict

There is a kind of axiom of geopolitics and social interaction that when the pie is growing and everybody can get more, even though their slice may not have been very big to begin with, there is a tendency for people to make do, go about their business and so forth. Reverse this and you have the concept that shrinking the pie – as austerity policies and the Great Recession have done – tends to increase levels of conflict. At first, to the extent that people have the idea that “we are all in this together” there may be increased cooperation. But that is not the current situation in almost any society. Quite the contrary, as Piketty and the Occupy Movement highlight, there is growing awareness of inequality of wealth and income.

There are armed conflicts in Syria, the Ukraine, Afghanistan (resurgent Taliban), and areas and regions in Africa. The Indian elections recently installed a Hindu nationalist who hopefully will be a reformer, but may, if the going gets tough, revert or acquiesce to more conflict with Pakistan and with non-Hindu populations within India. Pakistan, one of the world’s nuclear powers, appears to be extremely unstable politically. There are deep civil divisions in Thailand between city and rural areas that parallel class divisions. China is flexing its muscles in the South China Sea.

And we may be moving from an era of US-centric global capitalism to a time when the Eurasian supercontinent will become significantly more important and perhaps decoupled from Wall Street and the City of London. Already, there are threats to dollar supremacy, and, historically, as US economic power is eclipsed by the more rapidly growing economies of Asia, some adjustment seems predictable.

In all this, Hollywood can be counted on to roll out some really corking new international intrigue films, perhaps (although I doubt it) with more complex plots.

The Situation with the US Federal Reserve Bank

The point of this international survey and reprise of recent business history is to highlight areas where surprises may originate, shaking the markets, and perhaps triggering the next recession.

But the most likely suspect is the US Federal Reserve Bank.

Two graphs speak volumes.

Seeking to encourage economic recovery, the US Federal Reserve dropped the federal funds rate to a number effectively almost zero – a historically low number. This zero bound federal funds rate has persisted since the end of 2009, or for about five years.

The Fed also has engaged in new policies, whereby it goes into private bond markets and buys long term bonds – primarily mortgage-backed securities. The second chart tracks this inasmuch as a good portion of the more than 4 trillion in Fed assets (for which there are corresponding liabilities, of course) are these mortgage-backed securities. In effect, the Fed has purchased a sizeable portion of the US housing market – one might say “nationalize” except that would be forgetting the fact that the Fed is actually a private institution whose governance is appointed by the Executive Branch of the US government.

In any case, this bond-buying is the famous “quantitative easing” (QE) and is mirrored in the accumulation of excess reserves by the banking system. Generally, that is, banks and financial institutions issue mortgages, sell them among themselves to be packaged in mortgage-backed securities, and the Fed has been buying these.

Banks can easily loan these excess reserves, but they consistently have not. Why is an interesting question beyond the scope of this discussion, but the consequence is that the Fed’s actions are “firewalled” from increasing the rate of inflation, which is what ordinarily you might think would occur given that various metrics of money supply also have surged upward.

Now “Fed-watching” is its own little cottage industry among financial commentators, and I am not going to second-guess the media here. The Fed has announced a plan to “taper” these purchases of long term bonds. This is likely to increase the mortgage rates and, probably to some extent, based on expectations already has.

So, the long and the short of it are that this set of policies – zero federal funds rate and bond buying cannot go on forever.

If economic growth has been low-grade since 2010 with these low interest rates, what is the reasonable outlook for a higher interest rate regime?

Timing of the Next Recession

When is the most likely time for a recession, for example? Would it be later in 2014, in 2015, or thereafter, maybe in 2016.

Here is a table of all the recessions in the US since the middle 1850’s along with facts about their duration (source: NBER).

Without even considering averages, the maximum period of trough to trough – that is, from the bottom of one recession to the bottom of the next – has been 128 months or ten years and eight months. Here, incidentally, the month numbers begin January 1800, for what that’s worth.

Thus, at the outside, based on these empirics, the trough of the next recession is likely to occur no later than early 2020.

Note that we have already blown through the average length from trough to trough of about 58.4 months or about five years from June 2009.

On a simple probabilistic basis, therefore, we are moving into the tail of the distribution of business cycle durations, suggesting that the chances of a downturn are in some sense already above 50 percent.

And note that the experience of the current business recovery is nothing like this historically maximum span in the 1990’s between the trough of the recession of 1990-1991 and the trough of November 2001.

This business recovery persistently seems to move ahead just above or, in the last quarter of 2013, below “stall speed.”

Seemingly, a fairly minor perturbation could set off a chain reaction, given the advanced frothiness in the stock market and softness in housing prices.

More of the Same, Worse

Neil Baroifsky was special inspector with oversight authority for the TARP during the bailout phase of the Great Recession, and currently is a partner in the Litigation Department of national law firm Jenner & Block LLP.

He’s also an author and often is called on for his opinion about developments in malfeasance writ large among the finance giants – such as the Credit Suisse settlement. In connection with a recent NPR interview, Barofsky said,

Although it is good that we averted a catastrophe back in 2008, the way that we did so I believe has unfortunately set the stage for an even more devastating financial crisis in the future.

HOBSON: In the future? How far?

BAROFSKY: Well, if I knew that, Michael Lewis would be writing his next book about people who made billions on timing the markets perfectly about me, which would be great.

(LAUGHTER)

BAROFSKY: But if you look, a lot of the same broken incentives from 2008 are still there. It’s just a question of when, not if. You can’t look at the fundamental broken incentives in the financial system and really come to a conclusion other than that we’re headed down the same dangerous path that we were that culminated in the explosion of ’08.

And the “pass the buck” system, whereby bond rating agencies are paid by the originators to evaluate exotic securities (“financial innovations”) created by the banking and shadow banking industries, securities which are then passed on to pension funds and hapless investors – this system appears to still be completely in place. Talk about the concept of “moral hazard.”

Global Impact

I think you get the picture.

For one reason or another, some fairly minor event is likely to set off a cascade of consequences in US and global financial markets, leading to the next recession. Probably, within one, two, or three years, as a matter of fact. Because the US Fed, and, for that matter, other central banks will still be working their way out of the last recession, there may be fewer “policy tools” to halt the stampede to sell, cutback, and so forth. Governments could respond with aggressive fiscal policy, but that option appears limited unless there are major changes in the political climate in the US and Europe.

Personally, I think wholly new directions of policy should be contemplated at the personal, local, regional, and of course at national levels.

We need to create what I have started to call “islands of stability.” This is the old idea of local self-reliance, but in new packaging. I really think there should be discussions widely across the US at least about how to decouple from the global economy and, indeed, from the financial concentrations on Wall Street. As a matter of self-preservation, until such time as more courageous national policies can be undertaken to reign in such obvious risks.

American democracy used to depend on political parties that more or less represented most of us. Political scientists of the 1950s and 1960s marveled at American “pluralism,” by which they meant the capacities of parties and other membership groups to reflect the preferences of the vast majority of citizens.

Then around a quarter century ago, as income and wealth began concentrating at the top, the Republican and Democratic Parties started to morph into mechanisms for extracting money, mostly from wealthy people.

Finally, after the Supreme Court’s “Citizen’s United” decision in 2010, billionaires began creating their own political mechanisms, separate from the political parties. They started providing big money directly to political candidates of their choice, and creating their own media campaigns to sway public opinion toward their own views.

Most African water utilities began experiencing a nose-dive in the late 1970s under World Bank and IMF policies. Many countries were suffering from serious trade deficits which had enormous implications for their budgets, incomes, and their abilities to honour loan obligations to, among others, bilateral and multilateral partners. These difficulties for African countries coincided around that period, with a major shift in global economic thought; a shift from heterodox economic thinking which favoured state intervention in critical sectors of the economy, to neoliberal economic thought which is more hostile to state intervention and prefers the deregulation of markets and their unfettered operation. This thought became dominant in the IMF and World Bank and influenced structural adjustment austerity packages that the two institutions prescribed to the struggling African economies at the time. This point is fundamental and cannot be divorced from any comprehensive analysis of the access deficit in African countries.

The austerity measures enforced by the Bank and IMF ensured a drastic reduction of state funding to the utilities, resulting in deterioration of facilities, poor conditions for staff and a mass exodus of expert staff. In the face of the resulting difficulties, the Bank and IMF held out only one option for the governments; the option of full cost recovery and of privatisation. This sealed the expectations of any funding for the sector as the private sector found the water sector highly risky to invest in. Following the common interventions set out by the World Bank, the countries achieved mostly poor results.

Contrary to much mainstream discourse, neither privatisation nor commercialisation constitute an adequate or sustainable way of managing urban water utilities to ensure access to people in Africa given the extreme poverty that confronts a significant portion of the population. The solution lies in a progressive tax-supported water delivery system that ensures access for all, supported by a management structure and a balanced set of incentives that ensure performance.